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Curious Cat Kivans

Investing and Economics Blog

The average rate on a 30-year fixed mortgage dropped to 5.07 percent for the week ending Feb. 26 from 6.63 percent for the one ending July 24
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“A score of 700 was once near perfect,” said Gwen Muse Evans, vice president of credit policy at Fannie Mae, the government-controlled company that helps set lending standards. “Today, a 700 performs more like a 660 did. We have updated our policy to take into account the drift in credit scores.”

Consumer credit scores, called FICOs after creator Fair Isaac Corp., range from 300 to 850. The average FICO score on mortgages bought by Freddie Mac and Fannie Mae rose to 747.5 in the fourth quarter of last year from 722.3 in 2005, according to Inside Mortgage Finance.

Accunet’s Wickert said that a 660 FICO score would have qualified most borrowers for loans with no upfront fees in the past. Now, someone trying to borrow $200,000 with a 660 score would have to pay a 2.8 percent fee, or $5,600, he said. Even someone with a 719 score would have to pay $1,750 in cash.

The low mortgage rates are attractive but a decision to re-finance (or buy) must consider the long term implications. Also if you are re-financing to take advantage of the low rates consider a 20 year or 15 year loan if you are already well into your 30 year loan. A fixed rate loan is the most sensible option at this time.

Warren Buffett is really someone worth listening to. This is a short talk he gave to MBA students and then he answers questions for over an hour. I think he is speaking at the University of Florida in 1998.

Here is a great quote to remember as you invest (from part 2): “To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish.” That goes for anyone I think. He was talking about the geniuses behind Long Term Capital Management (and the collapse about a decade ago – for those of you that think finance people risking serious harm to the economy for their personal gain is something new, it isn’t). You can read a good book about Long Term Capital Management’s fail: When Genius Failed.

UBS was sued on Tuesday in a Swiss federal court by wealthy American clients seeking to prevent the disclosure of their identities as part of a tax-evasion investigation by the United States Justice Department.
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The lawsuit, which UBS described in an internal memo late Tuesday, stems from UBS’s agreement last week to turn over to federal authorities in Washington the names of 250 wealthy Americans suspected of using secret UBS offshore accounts and entities to evade taxes.

UBS reached a $780 million deferred-prosecution agreement to settle accusations that it used undisclosed offshore private banking services to help wealthy Americans evade taxes. But the bank is still under scrutiny by the Justice Department, which is seeking to force it to disclose the names of the 52,000 American clients it suspects may have evaded taxes.

So how many of these people will be serving time in jail do you think. Lets say for example, they ended up stealing $10,000 from the US government by evading taxes. Now UBS has to worry about the Swiss laws on disclosing information. But for the Americans all they are doing is trying to cover up a crime they committed. Do you think they will be punished for the crime in the first place? What about for trying to cover up the crime after the fact? The lack of moral fiber of so many rich in the USA is disheartening. I hope those that tried to steal from all the rest of us, and then tried to cover up their crimes, are thrown in jail at least as long as an average criminal that is young and poor that steals the amount they did and then tries to prevent witnesses from providing evidence to the Justice Department. And not in some country club jail either. But I doubt they will be. More rich people act ethically than those that don’t, but the number that are outrageously unethical is far too high.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.

A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

Just last November the S&P 500 dividend yield topped the bond yield for the first time since 1958. Yields often rise as stock prices fall on future prospects and companies announce dividend cuts after stocks have already fallen (due to the deteriorating conditions the company faces). So you always must be careful not to count dividends before they are paid. As an investor you need to look into the future and see how secure the dividends are likely to be.

About 1.92 percent of homeowners with 2008 mortgages backed by Fannie Mae and Freddie Mac fell at least 60 days behind, LPS Applied Analytics said. Jumbo loans are bigger than what the two government-controlled agencies buy or guarantee, and Obama’s plan focuses on shoring up mortgages eligible to be bought by Fannie and Freddie.
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The top five U.S. jumbo lenders — Chase Home Finance LLC, Bank of America Corp., Washington Mutual Inc., Wells Fargo & Co. and Citigroup Inc. — originated a combined $55.3 billion in jumbos in 2008. They lent just $4.3 billion of that during the last three months of the year, according to Inside Mortgage Finance.
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The national average for a 30-year fixed-rate jumbo mortgage was 6.57 percent this week compared with 5.34 percent for a conforming loan, according to White Plains, New York-based financial data provider BanxQuote.

The huge banking bailouts and stimulus bill are meant to counter-balance the huge problems the economy is suffering through. The damage caused to the economy, is largely from unwise risks that were allowed by regulators and politicians that have not panned out and are now greatly damaging the economy. It is always easy for politicians to pay out money in an attempt to buy our way out of problems. That is what the stimulus and bailout bills are doing. They are yet again heaping huge debts on our children and grandchildren.

The bailout and stimulus packages are not about preventing foolish risks to the economy by huge banks that would make the economy safer in the future. Those types of bills are very hard to pass as the politicians get great sums of money to allow people to risk the economy for their own benefit. The concept of the stimulus is not to fix the cause of the problem but do cope with the problem we are left with due to people that paid themselves huge amounts of money. Now the taxpayers get to fund the huge payouts wall street has given themselves.

This is because they never actually provided the value they claimed. They merely created false returns to claim they provided a benefit to justify obscene pay (many of them truly didn’t understand this is what they were doing so beyond failing they were so incompetent [while accepting well over a million dollars a year] they didn’t even understand that the financial games they were playing were failing. It is hard to know what is worse, being so incompetent while claiming you deserve millions or knowing you are just paying yourself money based on false claims of value.

Either way, the banks are left bankrupt – having worthless securities created by those paying themselves huge amounts of money. If the huge banks fail the financial system collapse creates huge problems – businesses that have operated for decades by borrowing some funds (responsibly) go bankrupt because no funds are available to lend them, etc..

The stimulus is not about fixing the problems of the past it is about countering the huge decline from the bubble economy. That bubble economy was funded largely by claiming value where none existed thereby allowing people to spend huge amounts of money based on those faulty claims. How people are shocked that playing financial games doesn’t actually make hundreds of billions of dollars appear out of thin air is beyond me.Read more

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker told a luncheon of economists and investors at Columbia University.
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He stressed the importance of preventing financial institutions large enough to pose a threat to the entire system from engaging in risky behavior such as running hedge funds or trading for its own accounts.

He is certainly right on the second point. I must say the decline is bad. And the recent new on jobs and GDP have been bad. It doesn’t strike me as approaching the depression type problems but he didn’t say the economy was approaching a depression, just that the decline was steeper now, perhaps. When he says something like that it makes me at least want to pay a bit more attention to the economy.

His reward for paying on time was an interest rate increase to 19 percent from 12 percent.
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The average interest rate charged on credit-card balances decreased to 13.4 percent in November from 14.4 percent a year earlier, according to the Federal Reserve’s December G19 report, which tracks rates for credit-card accounts. The prime rate has decreased to 3.25 percent from 6 percent last February. Most variable credit-card rates are linked to the prime rate, which follows the federal funds rate.

Rate changes announced by New York-based Citigroup Inc., the biggest U.S. credit-card issuer, American Express Co. and Charlotte, North Carolina-based Bank of America Corp. are intended to raise revenue, said Woolsey, who is based in Austin, Texas.

Citigroup’s charge-off rates of loans increased by 88 percent, climbing to 7.81 percent in December from 4.16 percent a year earlier, according to data compiled by Bloomberg. Charge- offs are loans the banks don’t expect to be repaid. American Express’s charge-off rates more than doubled to 7.23 percent from 3.32 percent while Bank of America’s rates increased to 8.45 percent from 5.24 percent, a 61 percent jump.

Who Will Buy All the USA’s Debt? That is a question worth thinking about. The USA is a huge net borrower. The government can’t borrow from consumers because they are hugely in debt themselves. Over the last few decades huge investments from Japan, China and the Middle East in USA government debt have allowed the huge amount of federal debt to continue to grow rapidly. But who is going to buy the increasing amounts of debt; in the next few years, and the next few decades?

Chinese doubts about the value of US Treasury bonds highlight a crucial question: who will buy the estimated $2.7 trillion (Â£1.9 trillion) to $4.2 trillion of debt expected to be issued over the next two years?
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The other area of concern for China is the value of its Treasuries. Given the US borrowing requirement and its lax monetary policy, Treasury bond yields could well rise sharply, causing a corresponding price decline. If China’s holdings match Treasuries’ average 48-month duration, then a 5pc rise in yields, from 1.72pc on the 5-year note to 6.72pc, would lose China 17.5pc of its holdings’ value, or $119bn.

Foreign buyers have absorbed a little over $200bn of Treasuries annually, a useful contribution to financing the $459bn 2008 deficit, but only a modest help towards the $1.35 trillion minimum average deficit forecast for 2009 and 2010.

Unless that changes substantially, there will be $1 trillion annually to be raised by the Treasury from domestic sources, more than double the previous record from domestic and foreign sources together, plus whatever is needed to bail out the banks.

Even if the US savings rate were to rise from zero to its long-term average of 8% of disposable personal income, that would create only an additional $830bn of savings — not enough to fund the domestic share of the deficit. Interest rates would probably have to rise substantially to pull in more foreign investors.

Very true. Anyone buying government debt at these rates has reason to question the wisdom of doing so. Exporters to the USA have macro-economic reasons for buying debt (to keep the value of the dollar from collapsing) but the investing reasons for buying USA debt I find very questionable (I wouldn’t be buying it as an investment, if I were them).

The world’s second-largest economy shrank 3.3 percent from the third quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the euro-zone’s 1.5 percent decline, which was the sharpest in at least 13 years.

“There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”
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Capital investment fell 5.3 percent. Manufacturers cut production by a record 11.9 percent in the quarter, indicating they have little need to buy equipment as factories lay idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent, as exporters fired workers.
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The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades.

The decline is huge. Economies shrinking 2% is a large and fairly rare event. Shrinking over 10% is dramatically bad. The drop appears to be largely due to falling exports as consumer spending only dropped by .4 percent. Since 1930 the US economy has only fallen over 10% in a year 1932 and 1946. And real GDP has fallen over 2% only 5 times, the most recent time close to that large a fall was in 1982 with a 1.9% decline). Data from the United States Bureau of Economic Analysis. There is a good chance the US GDP will decline between 2-3% in 2009.